Companies use merit and incentive reward schemes to motivate employees and align employees' objectives with company goals. The theory is that employees focus their efforts on the areas of work that generate the greatest reward. A 2007 study conducted by WorldatWork found that 79 percent of the private companies surveyed had a short-term incentive plan in place. There are a range of incentive reward schemes available to companies, including merit pay, bonus schemes, profit sharing and ad hoc rewards.

Measurable Results

Merit and incentive schemes reward employees for results achieved rather than hours worked. Merit and incentive schemes require defined standards and measurable results. The company must carefully define the desired results to ensure that it achieves its goal. If the company only rewards high levels of production, the quality of each unit produced may drop as employees rush to meet the target. A better measure would be the number of units produced to a defined quality standard.

Employee Control

If employees cannot influence the outcome of the reward system, it is unlikely to motivate them or change their behavior. If a company pays a bonus or profit share based solely on the company's overall performance, individual employees will view the payment as a windfall as the factors influencing success are too remote from their individual effort. Merit and incentive reward schemes are most effective when the success or failure of an objective lies within the employee's span of control.

Fairness and Transparency

Rewards based on individual merit create winners and losers within the workforce. The company awards the bonus or additional pay only to high performers. Unless employees are satisfied that the scheme is fair and transparent, it could lead to dissatisfaction, lower motivation levels and increased employee turnover. A perception of fairness is more likely when the scheme is open to everyone, goals are achievable and results are visible. Employees should be given regular feedback on progress against targets so that there are no unpleasant surprises at the end of the pay period.

Link to Company Performance

Merit and incentive reward schemes must be linked to the company's financial performance to ensure that they are affordable. The company may perform badly, even if employees work hard and deliver on their individual goals. The company's financial performance may be adversely affected by external factors, such as a downturn in the economy or unexpected competition driving down sales prices. In such circumstances, the company must have the ability to restrict merit and incentive scheme payments.

About the Author

Lynne MacDonald has experience in the fields of human resource management, training, organizational development and law. MacDonald received a law degree from the University of Dundee in 1990 and holds diplomas in personnel management and legal practice. She is a Fellow of the Chartered Institute of Personnel & Development.

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MacDonald, Lynne. "What Are the Essential Elements of Merit and Incentive Reward Systems?" Small Business - Chron.com, http://smallbusiness.chron.com/essential-elements-merit-incentive-reward-systems-19369.html. Accessed 24 May 2019.

MacDonald, Lynne. (n.d.). What Are the Essential Elements of Merit and Incentive Reward Systems? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/essential-elements-merit-incentive-reward-systems-19369.html